Fed’s Yellen Urges Higher Bank Capital Rather Than Size Limits

“We need to increase the transparency of shadow banking markets so that authorities can monitor for signs of excessive leverage and unstable maturity transformation outside regulated banks,” said Janet Yellen, vice chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

June 3 (Bloomberg) -- Federal Reserve Vice Chairman Janet
Yellen said she favors forcing the largest U.S. banks to hold
additional capital rather than limiting their size or requiring
sales of businesses.

“I am not persuaded that such blunt approaches would be
the most efficient ways to address the too-big-to-fail
problem,” Yellen said in a speech today in Shanghai. Instead,
Yellen said there may need to be “either a steeper capital
surcharge curve or some other mechanism for requiring that
additional capital be held by firms that potentially pose the
greatest risks to financial stability.”

U.S. regulators and lawmakers are seeking ways to limit the
risk that a large bank failure would result in another taxpayer-funded bailout. Fed Chairman Ben S. Bernanke said last month he
opposed size restrictions on banks and said they should instead
be forced to put up additional capital to ensure their safety.

While the preamble to the Dodd-Frank financial regulation
act says its intent is to “end ‘too-big-to-fail,’” some of the
largest banks may still benefit from the perception that they
would be rescued by the government, Bernanke told lawmakers in
February.

“Tougher prudential regulation and supervision have
substantially reduced the probability” of a failure of a
systemically important financial institution, Yellen said at the
2013 International Monetary Conference, according to the
prepared text of her remarks today. “But at the same time I’m
not convinced that the existing” work of regulators, “which
moves in the right direction, goes far enough.”

Additional Capital

Yellen also called for additional capital for banks to
reduce risk from short-term loans, which can become less
available in times of trouble.

“A major source of unaddressed risk emanates from the
large volume of short-term securities financing transactions --
repos, reverse repos, securities borrowing and lending
transactions, and margin loans -- engaged in by broker-dealers,
money-market funds, hedge funds, and other shadow banks,” she
said.

“The perfect solution may not yet be clear but possible
options are evident: raising bank and broker-dealer capital or
liquidity requirements” or “imposing minimum margin
requirements.”

Increase Transparency

“We need to increase the transparency of shadow banking
markets so that authorities can monitor for signs of excessive
leverage and unstable maturity transformation outside regulated
banks,” Yellen said. “We also need to take further steps to
reduce the risk of runs on money market mutual funds.”

Yellen, a 66-year-old former professor at the University of
California-Berkeley, is seen as the most likely person to take
the helm of the U.S. central bank when Bernanke’s term ends in
January, according to a quarterly poll of international
investors by Bloomberg News in May.